Concept of Banks and Banking Systems

 

Financial institution

A financial institution is an institution that provides financial services for its clients or members. Financial institutions provide service as intermediaries of financial markets. They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy. To do so, savings are brought to provide funds for loans.

Banking and Non-Banking Financial Institutions

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers that have capital deficits to customers with capital surpluses

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.

Examples: Insurance firms, Currency exchanges, and Microloan organizations.

Commerial Banks

The Banks that limit their major services in the business related activities. Although the banks invset their money in Agricultural and industrial sectors, they invest their major assets in business and export-import activities.

Functions of commercial banks

i.              Accepting Deposits

a.     Current Deposit, Fixed/Term Deposits, Saving Deposits

ii.             Giving loans/Investment

a.     Cash Credit(CC)

b.    Demand Loans

c.     Short-Term Loan

d.    Long-Term Loans

e.     Over-Drfat

iii.            Discounting Bills of Exchange

iv.            Agency functiond

a.     Collects cheques, drafts, bills of exchange, dividends of the shares of their customers

b.    Make payment for theirs clients

c.     Purchase and sell securities, shares and debentures on behalf of their customers

d.    Remittance

v.             Miscellanious functions

a.     Locker service

b.    Give referance for their customers

c.     Collect necessary and useful statistics relating to trade and industry

d.    Issue L/C

Role of Commercial Banks

1.       Banks promote capital formation

2.       Investment in new enterprises

3.       Promotion of trade and industry

4.       Development of agriculture

5.       Balanced development of different regions

6.       Implementation of Monetary policy

7.       Export promotion

8.       Create Employment

Structural Classification of Banks

Group Banking/Holding Company Banking-

If a company holds majority shares of several banks for controlling their operations centrally, the banking system is called group banking. Each bank in the group has its own board of directors, but the holding company coordinates the activities of all banks in the group, and owns a majority of capital stock in member banks. This type of bank is now obsolete in the world.

Chain Banking

It is also like Group Banking, that is, a company holds majority shares of several banks. Each bank in the group has its own board of directors and they work independently instead of central control. The holding company holds the positions of directors of the member banks. This type of bank is now obsolete in the world

Unit Banking

Unit banking refers to a single bank which renders services and operates without any branches anywhere. This kind of banking system is common in the USA.

Advantages

i.              More customer care is possible due to limited area and limited numbers of customers.

ii.             Time is saved as Decision-making is in the same branch

iii.            Proper checks are taken up. No misuse of Mismanagement

iv.            Less competition within the bank

v.             Cost of supervision is less

Branch Banking

Branch Banking refers to a single bank which operates through various branches in a city or in different locations or out of the cities. This kind of banking system is common all over the world.

Advantages

i.              Proper distribution of capital and power

ii.             Rate of interest is uniformed and specified by the head office

iii.            Deposits and assets are diversified, scattered and hence risk is spread at various places

iv.            Loans and advances are based on merit, irrespective of the status

v.             Larger business can be operated

Banks' activities can be divided into -

Retail banking- Dealing directly with individuals and small businesses;

Business banking- Providing services to mid-market business;

Corporate banking - Directed at large business entities;

Investment banking/Merchant banking - Relating to activities on the financial markets

A merchant bank is a financial institution which is primarily engaged in offering financial services and provides advice to corporations and to wealthy individuals. The term can also be used to describe the private equity activities of banking.

Example: Industrial DevelopmentLeasing Company of Bangladesh Ltd (IDLC), Uttara Finance and Investment Limited, LankaBangla Finance Limited, BRAC EPL Investment Ltd

Commercial Bank and Development bank

A Commercial bank is a regular bank that provides services like bank accounts, loans and credit cards to regular customers.

A development bank is one that provides loans and other financial aids and services to institutions that are involved in development activity like construction, building bridges, industries etc

Retail banking and wholesale banking

Retail Banking is typical mass-market banking where individual customers use local branches of larger commercial banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth.

Wholesale Banking is banking services between merchant banks and other financial institutions.

Transactional Banking and Virtual Banking

Transactions in phisical locations. Cash is the life-blood of such type banking.

Providing the banking services through extensive use of information technology without direct recourse to the bank by the customer is called virtual banking. Such as ATM, Phone banking, internet etc.

Universal Banking

A banking system in which banks provide a wide variety of financial services, including both commercial and investment services. Universal banking is common in some European countries, including Switzerland. In the United States, however, banks are required to separate their commercial and investment banking services. Proponents of universal banking argue that it helps banks better diversify risk.

Universal banks may offer credit, loans, deposits, asset management, investment advisory, payment processing, securities transactions, underwriting and financial analysis. While a universal banking system allows banks to offer a multitude of services, it does not require them to do so.